Sunday, March 8, 2009

A VERY scary inflation graph

Basically, if we went back to 2006, before the credit crisis began, and the only thing we did was enact the stimulatory things the Bush and Obama governments have been doing, the price of everything would approximately DOUBLE. In my opinion, this would quite quickly eat at any benefits.

Of course, this is extremely simplistic. We need to expand the monetary base (which is what would cause the prices to rise) substantially if we want to survive the crisis, and it's something we can contract later, and any US inherent productivity capacity growth (distinct from GDP in that GDP measures what we do produce and capacity measures what we can produce) would decrease that over time.

However, it does make a decent case for this: EXPECT INFLATION IN THE FUTURE.

It creates a sick paradox, too. I harp on redistribution a lot, but that's cuz it's important.

The problem is that if prices for everything (on average) double, poor people can't afford what they're buying. However, money in the hands of rich people mitigates the level of inflation you see because of higher investment. In other words, money in the hands of rich people lets you 'grow out' of your inflation, but poor people get hammered in the interim. Everyone's better in the long run, but you need to make sure poor people survive to see the long run. Money moved to poor people prolongs the pain for everyone, but in the interim, poor people do better.

Really, really pray that this green energy investment actually pays off, and big time. If the cost of green energy drops significantly, you may see a significant reduction in our trade deficit, and if you're really successful, the cost of energy may drop. That's a way to help mitigate inflation.